The Effect of Merger and Acquistion on the Growthof the Banking Industry

Topics: Bank, Mergers and acquisitions, Financial services Pages: 19 (6029 words) Published: August 10, 2012
BACKGROUD OF THE STUDY Growth is essential for sustaining the viability, dynamism and valve-enhancing capability of a firm. It is incontrovertible that banking system is the engine of growth in an economy, given its function of financial intermediation. Through these functions, banks facilitate capital formation, lubricate the production engine turbine and promote economic growth through mobilization of fund from surplus sector and use same to finance deficit sector of economy. However, banks’ ability to engender economic growth and development development depends on the health, soundness and stability of the bank system. Nigeria banking sector has experienced a boom-and-burst in the past 20 years .After the implementation of the structural adjustment programme (SAP) in 1989 and de-regulation of the financial sector, new banks proliferated mainly driven by attractive arbitrage opportunities in the foreign exchange market (heiko 2007) but prior to the de-regulation period ,financial intermediation never took off and even declined in the 1980’s and1990’s (capirio and kligbiel). The sector was highly oligopolistic with remarkable features of market concentration and leadership .Lemo noted that there are banks that control more than 50% of the aggregate assets of the banking sector ,more than 51%of the aggregate deposits liabilities and more than 45% aggregate credits. The sector was characterized by small scale banks with high overheads; low capital base averaging less than $10 million; heavy reliance on the government patronage and loss making. Nigeria’s banking sector was still characterised by high degree of fragmentation and low level of financial intermediation up to 2004. It was against this background that the former Governor, Professor. Charles Soludo outlined the first phase of its banking sector reforms designed to ensure a diversified strong and reliable banking industry. In view of the stability in the Nigeria banking system, evidence shows that frequent bank distress and failures occurred in the late 1980s and1990s, the Federal Government through the CBN instituted various measures reposition banking industry for greater performance. Following the 18 months ultimatum given by the central bank of Nigeria on July 2004 to all deposit taking banks in Nigeria to increase their paid-up share capital to a minimum of N25 billion ($190 million-US) with a deadline of December 31,2005. This directive led to an unprecedented number of merger and acquisition otherwise called consolidation among Nigerian banks. According to Umoh (2004) merger and acquisition are expected to address the problem of distress among insolvent banks without an initial resort to liquidation. Merger and acquisition has been suggested therefore as an instrument for banking soundness, more secure banking system that depositors can trust, enhanced operational capital base these and many more ,act as a spring board to achieving improved efficiency. This research work seeks to evaluate the effect of merger and acquisition on the growth of the banking sector.

The ongoing banking industry consolidation in Nigeria represent the latest attempt by the Central Bank of Nigeria (C.B.N) to solve the problems of bank distress and failure and to reposition the industry for national and global economic challenges, the lastest reform that compelled all commerecial banks to raise their capital base from 2million to 25billion on or before 31st December 2005 sent some of tthe banks on there heels-considering consolidation(merger and acquisition). The expected problems regarding consolidation are:

There exists a high degree of calculated risk –taking to tap opportunities that come this way of business, but there is risk avoidance in Nigeria business and where...
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